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Policy shifts make India's trade regime less predictable, raise costs: WTO

03 June 2015

The constant changes in tariff structure and trade policies combine to make India's trade policy regime less predictable, the World Trade Organisation (WTO) said in its sixth review of India's trade policy released on Tuesday.

In its review, which is based on a report by the WTO secretariat and a report by the government of India, WTO noted that India's trade policy has largely been driven by domestic supply considerations and also intended to attain short-term objectives, such as containing fluctuations in commodity prices.

This requires constant fine-tuning of policies, for example, through notifications by the Directorate General of Foreign Trade (DGFT) and customs, rendering the trade regime less predictable and creating additional costs.

WTO noted that during the period under review, India continued its efforts to liberalise and facilitate trade, such as through the introduction of self-assessment in customs procedures and the elimination of state-trading requirements for some agricultural products. India also proceeded with further structural reforms, including by eliminating price controls on diesel and relaxing foreign direct investment (FDI) restrictions in some sectors.

Nonetheless, the tariff structure remains complex and the simple average most favoured nation (MFN) tariff rate increased during the review period.

India is streamlining its customs procedures and implementing trade facilitation, but the country's import structure still remains complex, WTO has said.

India, it said, took to self-assessment for customs procedures in 2011 to facilitate trade, and around 97.6 per cent of imports were processed through the risk management system.

"Despite the implementation of these measures, India's import regime remains complex, especially its licensing and permit system, and its tariff structure, which has multiple exemptions, with rates varying according to product, user or specific export promotion programme," the Geneva-based multi-lateral organisation said.

India is an original member of the WTO and provides MFN treatment to all members and other trading partners. It accepted the Fourth and Fifth Protocols of the GATS. India is a strong advocate of the multilateral trading system and has historically been party to few regional trade agreements.

However, despite India's reservations, regionalism has increasingly become an element of its overall trade policy objective of enhanced market access for its exports. This is evidenced by the 15 agreements currently in force and its involvement in the negotiation of other agreements.

According to WTO, it is India's objective of pushing its exports that makes the country's trade policy regime restrictive.  It has also cited India's trade policy objectives stipulated in India's Foreign Trade Policy (FTP), which is issued every five years, and revised periodically to take into account internal and external factors.

The new 2015-20 FTP, released on 1 April 2015, aims to make India a significant participant in international trade and to raise its share of global exports to 3.5 per cent in 2020.

This is expected to be achieved by providing a sustainable and stable policy environment for foreign merchandise and services trade; linking rules, procedures and incentives for trade with other recent initiatives such as "Make in India", "Digital India" and "Skills India"; promoting the diversification of India's exports by assisting key sectors to become more competitive; and creating an architecture for India's engagement with key regions of the world.''

Measures to attract FDI have included gradually increasing the number of sectors in which FDI is permitted and reducing sectoral restrictions. WTO noted that since its last review, India has continued to liberalise its investment policies, including raising foreign-ownership limits in some sectors, such as insurance and railway transport.

According to the WTO, India, which supports the multilateral trading system, has taken several initiatives to modernise its intellectual property regime (IPR) administration and continues its efforts to enforce IPRs.

At the same time, India has historically been party to a few regional trade pacts, including the SAARC.

"However, despite India's reservations, regionalism has increasingly become an element of its overall trade policy objective of enhanced market access for its exports. This is evidenced by the 15 agreements currently in force and its involvement in the negotiation of other agreements," it added.

It noted that the simple average MFN (most favoured nation) tariff rate in India rose to 13 per cent in 2014-15 from 12 per cent in 2010-11.

"This reflects a rise in tariffs in agriculture, particularly for cereals and preparations thereof, oilseeds and fats, and sugars and confectionery," it added.

It also took note of India's WTO-bound tariff levels "much higher than the applied rates", especially for many agricultural products.

While such modifications allow the government to respond better to domestic and international market conditions, they reduce tariff predictability.

The report also noted that India continued to apply import quotas on marble and similar stones and sandalwood.

"State trading applies to certain agricultural goods, urea, and certain petroleum oils as a policy tool to ensure, inter alia, a fair return to farmers, food security, supply of fertiliser to farmers, and functioning of the domestic price support system," it added.

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